Are Residential Solar Leasing Funds Raising Capital?

As the Coke and Pepsi of the residential solar leasing space, they are battling it out in California and other states with competing business models that help homeowners avoid writing a check for $30,000 – the average cost of a home solar system. At the same time, they are saving homeowners around 15% on their utility bills oftentimes with no upfront costs, driving substantial growth in the solar market.

But are they raising capital in this tough economic environment? The answer, surprisingly, is yes.

We interviewed the three biggest U.S. residential leasing funds: SolarCity, SunRun and Connecticut Solar Lease and asked them to discuss their business models, what makes them bankable and how they are attracting financing.

SolarCity: Developing Markets Across the Southwest

While SolarCity and SunRun share similar business models for their leasing business – generating revenue by charging homeowners a reduced rate per kilowatt-hour for residential solar PV systems through a long-term lease or Power Purchase Agreement – their organizational structures are different. SolarCity is vertically integrated with its own installers and SunRun uses large regional third-party installers.

Historically, the tax-equity market has driven solar project finance, i.e. developers could take advantage of the 30% federal Investment Tax Credit.  But the credit crisis of 2008 and 2009, the reduction in the number of tax equity investors and the loss of tax appetite for the existing investors has created a challenging environment for raising leasing funds. Mike Niver, Director of Project Finance at SolarCity says his company was “able to weather the storm based on a proven model as a full-service solar provider.”

SolarCity closed a tax-equity fund with US Bank in June 2009, which it later doubled. In January of 2010, SolarCity announced a $60 million fund raised with Pacific Venture Capital, the unregulated arm of California utility PG&E.  The fund is expected to finance more than 1000 residential and commercial solar systems. And in March 2010, a third US Bank Fund for $90 million was announced.

SolarCity has now raised separate tax-equity funds with Morgan Stanley, National Bank of Arizona, Pacific Venture Capital and Greystone Renewable Energy Ventures, and three separate funds with US Bank since 2008, despite one of the worst capital environments in the last few decades.

At the end of February, SolarCity launched in Texas partnering with TXU Energy to extend its solar offering to the Dallas market joining California, Arizona, Oregon and Colorado. SolarCity is building a national solar brand and selecting new state markets based on “sun, incentives and utility rates it can compete with” according to Niver.

SunRun: Financing Solar from California to Massachusetts

While SolarCity is a full service solar provider with its own installers, SunRun finances, owns, maintains and monitors residential systems outsourcing installation to regional installer powerhouses like Mercury Solar in New Jersey. According to Ed Fenster, founder and CEO, SunRun’s customer value proposition is to “make solar energy affordable and riskless for homeowners ensuring a hassle-free experience.”

Along with California, SunRun offers its residential leasing alternative to homeowners in Arizona, Colorado, Massachusetts and New Jersey and expects to more than double its installations and leases from 2000 in 2009 to 5000 in 2010.

In order to guarantee the volume of houses necessary to attract investors, SunRun has forged innovative partnerships across the country. In March 2009, SunRun announced its partnership with One Block Off the Grid (1BOG), the San-Francisco-based community solar residential aggregator that negotiates volume discounts for blocks of homeowners. Through the SunRun-1BOG partnership, homeowners can finance solar installations with SunRun leases, with an additional 1BOG group discount to sweeten the deal.

In April 2010, SunRun announced a partnership with Massachusetts-based Alteris Renewables to help finance solar installations in the Massachusetts market. 

As for raising capital, just this week, SunRun announced a $100 million tax equity fund with Pacific Energy Capital II, LLC, a non-utility subsidiary of PG&E Corporation.  The money is expected to finance 3,500 home solar installations. Prior to that financing, SunRun closed two rounds of tax equity financing with US Bank along with funding from its Silicon Valley VC backers, Foundation Capital and Accel Partners.

With triple-digit revenue growth and strong regional brands, both SolarCity and SunRun are well positioned for an IPO, another way of raising capital to finance growth to new state markets. SolarCity’s Niver says, “If we continue on current growth trajectory, an IPO would be one of several options.”

One State with Its Own Solar Fund

Connecticut Solar Lease, a US Bank-backed LLC with state partner Connecticut Clean Energy Fund, counts on the state subsidy to make project economics work for investors. The Gemstone Group, a Pennsylvania-based boutique investment bank, coordinated fundraising and brought in US Bank as its tax equity investor. Adam Stern, Managing Director at Gemstone Group characterizes the Connecticut fund as one of, if not the first, residential leasing program in the United States, launching before both SolarCity and SunRun.

Demand was strong in 2009 with approximately 850 residential installations and the CCEF rebate fund sold out. As of February 2010, CT Solar Lease stopped accepting new applications and is waiting for state rebates to be funded.

CT Solar Lease finances its residential installations like SolarCity and SunRun: with tax-equity financing from US Bank. But Stern would like to see lenders emerge and add debt to project finance capital structures. Stern says that while “current players like US Bank and Bank of America are tax equity investors and not lenders, it’s a perfect investment for banks and insurance companies: low-risk, cash flow from SRECs, electricity revenue, lending against collateral. Lenders need to be educated so that they can develop specialty lending.”

 Challenges for Small Solar Developers

Small solar developers, those raising funds under $10 million or so, the typical threshold for tax or private equity, face additional hurdles. Both SunRun’s Fenster and Stern agree that developers need volume to get investors’ attention.

And that means a pipeline of 500 homeowners or more ready to sign leases.

Urban Eco Electric, a prospective Philadelphia residential leasing fund, was established in May 2009 and had signed up about 100 homeowners before it pulled the plug in January 2010 due to, among other things, insufficient investor interest.

Stern calls the UEE failure a perfect storm of “bad timing, decline of tax appetite and investors, and a small volume of houses.” He adds, “You need volume to get investors’ attention. CPA and legal fees are expensive and raising a fund to install 60 kW, 600 kW, or 6 MW requires the same amount of work, so, clearly, you need volume for it to be bankable.”

The good news: it’s still early in the overall solar market timeline. Even though many consider solar to still be in the early-commercialization stage and dependent on subsidies, the market has moved from innovators to early adopters and beyond, especially in California. At a recent renewable energy conference, a panelist from VantagePoint Partners, a Silicon Valley VC, compared the current period for solar and renewable energy to the period between 1980 – 1985 for technology.

It will be interesting to see how the residential solar leasing model evolves for both big and small developers.

Chris Cather has written frequently on solar energy and is currently advising Kenergy Solar, an Annapolis, MD solar developer. He can be reached at ChrisCather2001@yahoo.com